Elite Commercial REIT 1H 2023

JC Project Freedom Elite Commercial REIT

We just saw the announcement that the CFO Joel will be leaving the business. Within a few months, we saw a few of the senior management do a complete musical chair. Is this REIT under distress? The Elite Commercial REIT’s portfolio (“Portfolio”) comprises 155 predominantly freehold commercial buildings strategically located and geographically diversified across the UK with an aggregate value of £466.2 million. The Portfolio has a total net internal area of approximately 3.9 million square feet and a total site area of 72 hectares.

Financial Presentation 1H2023

The Portfolio offers a stable cash flow with over 99.0% of the gross rental income derived from the AA-credit-rated UK Government and a long weighted average lease expiry of 4.5 years. The leases are on full repairing and insuring (“FRI”) basis and the Portfolio is primarily occupied by the Department for Work and Pensions (“DWP”), the UK’s largest public service department that is responsible for welfare, pensions, and child maintenance. DWP is a uniquely resilient occupier and the Portfolio is part of the crucial public infrastructure through which DWP provides services to the community.

Distribution per Unit (“DPU”) was 1.94 pence in 1H 2023, which grew 6.4% quarter-on-quarter. The Higher revenue is mainly due to rent escalation of about 13.1% for 136 assets following inflation-linked rental uplift effective 1 April 2023. Revenue for 1H2023 is £19,098,000 which is 3.4% higher than 1H2022 which is £18,474,000. The REIT proposed divestments of Openshaw Jobcentre, Manchester, and John Street, Sunderland for £1.1 million, at about a 14.4% premium to valuation, with another three vacant assets in the advanced stages of divestment. Recycled gross proceeds largely go towards executing ongoing asset management strategy and reducing gearing.

In addition to the divestments, the Manager has finalized the dilapidation settlements for four assets following collaborative negotiations with the REIT’s primary occupier. Dilapidation settlement is a unique term in Elite REIT’s lease agreements, in which the Manager will negotiate with tenants on a sum to be paid in full for the final release of reinstatement liabilities. Do note there is key customer risk with this REIT and the customer will have higher bargaining power as it owns 99% of the revenue.

The gearing ratio improved to 46.0%, lower by approximately 60 basis points compared to
31 March 2023, with no refinancing requirement until November 2024. The Manager aims to
reduce gearing further through strategic capital recycling as well as asset management strategies to increase the value of the REIT’s assets. There will be more reduction of assets to bring down its outstanding debt.

From the Elite Commercial REIT’s income statement

The Finance Costs increased from £2,912,000 in 1H2022 to £5,937,000 in 1H2023. The Net Finance Costs is close to £4m.

Investment properties are stated at fair value. The fair values were based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after property marketing wherein the parties had acted knowledgeably, prudently and without compulsion.
The carrying values of the investment properties as of 31 December 2022 were based on independent professional valuations undertaken by Knight Frank UK LLP. The Manager has internally assessed that the fair valuation of the investment properties on 30th June 2023 approximates the fair valuation of the investment properties on 31st December 2022. In order to assess the impact of the performance of the UK property investment market between 31st December 2022 and 30th June 2023, the Manager sought advice from a leading global consultancy in commercial real estate in relation to the performance of the UK Property Market during the first 6 months of 2023 and has reviewed information relating to the
prevailing market conditions in the UK, the CBRE Monthly Index and its corresponding yield movements. The Manager has also taken into consideration i) the additional £3.7 million of sustainability amount disbursed to the tenants during the current period; ii) the result of the rent review and loss in rental for the vacant units, coupled with the credit strength of the government tenant; and iii) the expectation of the tenant remaining in a proportion of the portfolio beyond 2028. The Group continues to collect close to 100% of the rent, 136 assets were up for rent review on 1 April 2023 and benefited from 13.1%
net annualized rent increase, offsetting the loss in rental from 8 assets that were vacant on 1 April 2023. It is expected that there remains to be a reasonable demand for the portfolio of investment properties.

From Notes 5 – Fair Value

Debt profile

Its debt profile looks challenging for the next 2 years. £125m due in Q4 2024 and £76m are due in 2025.The Trust has in place a S$300.0 million multicurrency debt issuance program (the ‘Programme’), which was set up in October 2022 for the issuance of notes and/or perpetual securities. At the reporting date, there were no issuances made under the Programme.

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